Outlook for the bulk purchase annuity market in 2025

The bulk purchase annuity (BPA) market has demonstrated remarkable resilience despite shifting economic conditions. Demand remains strong, but the continued focus on regulatory developments and evolving longevity expectations will require insurers to stay agile in 2025.

2024 sustained the momentum from the previous year, with a record-breaking number of transactions taking place. Notably, while 2023 was characterised by large-scale deals, 2024 saw a growing number of small and mid-sized schemes securing transactions, with insurers increasingly eager to offer solutions at this level.

Gilt yields have maintained their upward trend this year, and while credit spreads have stayed tight, insurers’ ability to adjust asset strategies — combined with stronger pension scheme hedging — has ensured that pricing and demand remain robust.

The provider landscape has also experienced change, including Rothesay’s acquisition of Scottish Widows’ back book (pending Court approval) and the entry of new players such as Royal London, Utmost, M&G, and Blumont Annuity. The coming year is likely to see further expansion in the market. Additionally, superfund transactions by Clara Pensions with Debenhams and Wates Group in 2024 highlight the increasing range of risk transfer solutions available. As more firms enter this space, competition is set to intensify.

Regulatory developments

With the BPA market growing at an unprecedented rate and firms’ Matching Adjustment (MA) portfolios expanding, the Prudential Regulation Authority (PRA) has continued to refine its supervisory approach.

June 2024 saw the release of policy statement PS10/24, introducing several changes to the MA framework. A key development is the requirement for insurers to attest that their reported MA benefit is appropriate. This attestation process, aimed at enhancing risk management, is now a mandatory part of firms’ 2024 year-end reporting.

The MA plays a crucial role in insurers’ capital requirements, enabling them to hold significantly less capital. However, as MA portfolios increasingly comprise illiquid and hard-to-value assets, insurers must rely on internal models for asset ratings and valuations. Some firms may need to marginally adjust the MA benefit they claim, though the overall impact on MA portfolios is expected to be limited.

At the same time, PS10/24 also introduces new investment flexibilities, which could lead to greater use of asset types such as callable bonds and asset-backed securities in MA portfolios in 2025.

Longevity considerations

Insurers continue to show strong demand for longevity swaps as a tool for managing risks associated with bulk annuity business.

Longevity assumptions are fundamental not only for pricing but also for reserving and cash flow matching within BPA firms.

The Covid-19 pandemic has complicated the process of setting longevity assumptions. Insurers have, on the whole, been more cautious than pension schemes in revising down life expectancy assumptions. However, the forthcoming CMI_2024 model is expected to include some material changes and should provide a clearer way to reflect the impact of the pandemic. Combined with the relatively low mortality rates observed in 2024, this could help to close the gap between insurers’ and pension schemes’ assumptions.

Large pension schemes looking to secure competitive pricing should consider the value of high-quality longevity data. For instance, having at least six years of credible death experience data — excluding the peak pandemic years — can provide a strong basis for negotiations.

Funded reinsurance

Funded reinsurance (funded re) has become an increasingly prominent feature of the BPA market. These quota share reinsurance agreements transfer both asset and liability risks on annuity portfolios to reinsurers, typically backed by collateralised assets.

The growth of the BPA market has driven greater demand for funded re as a capital and risk management tool. While it enables insurers to optimise their capital management and expand new business capacity, it also introduces counterparty risks. The financial strength of the reinsurer, the quality of collateral, and the accessibility of assets in stressed scenarios are all critical considerations.

Regulatory scrutiny of funded re arrangements has intensified. In July 2024, the PRA issued PS13/24, tightening risk management expectations. This was followed by further guidance from the Bermuda Monetary Authority (BMA) in December, emphasising the need for global regulatory coordination. Additionally, the PRA’s 2025 supervisory priorities letter has mandated the inclusion of a funded reinsurance recapture scenario in the 2025 Life Insurance Stress Test. This requirement compels firms to provide more quantitative evidence of their ability to withstand potential risks associated with funded re.

Despite these regulatory changes, BPA insurers are expected to continue using funded re within their risk and capital management frameworks. However, new regulatory constraints could lead to pricing adjustments from reinsurers, which may have some impact on overall insurer pricing strategies. Pension scheme trustees and sponsors should assess how funded re structures influence insurers’ risk profiles and financial resilience. We regularly advise on this area through our insurer review services.

Looking ahead

The year ahead is set to be an active one for the pension risk transfer market. Insurers will be managing an increasing volume of transactions while also adapting to regulatory developments and innovations like funded re. As market dynamics continue to evolve, we remain focused on supporting pension schemes and insurers in making well-informed decisions and responding to the challenges ahead.